Not all capital is equal, and anyone who tells you otherwise is eventually going to learn this lesson like most entrepreneurs do — the hard way.
When it comes to your business, it’s easy to be fueled emotionally rather than rationally.
If you’re struggling to become cash flow-positive, it can be even harder to objectively weigh the source of capital prior to accepting it.
When a friend of mine brought a small equity partner into a business that had been doing just fine on its own, he didn’t think this individual would cause a disruption. Eventually, the investor managed to transform his small share into a huge problem for the company.
The problem grew and tore the partners apart, ultimately forcing the founder out. This frustrating outcome could've been avoided had the growth partner been properly vetted.
In addition, raising money from friends and family is a relatively common practice that can be risky. These people have an emotional connection to you, which can cause them to make hefty, unwise wagers. This, in turn, puts a huge amount of stress on you to perform, driving you to make short-sighted decisions that are aimed at quick wins instead of long-term success.
It’s undeniable that growth requires capital, but a lesser-known fact is that it needs infrastructure and guidance as well. These resources aren’t as tangible as money, but experienced partners will help you avoid pitfalls that have tripped up countless entrepreneurs before you.
Finding the right money.
Putting aside the various types of financial deals that can be struck with a growth partner, there are numerous important factors to consider. To avoid making a costly mistake, follow these steps to vet potential investors:
1. Align Your Vision With Their Strategy.
Don’t let your desire for capital cloud your judgement. Finding the right partnership requires being upfront about your short- and long-term goals. Misleading an investor could drive him to try to push you out down the road, or at least lead to a drawn-out legal battle that hurts momentum and morale in addition to draining your company's value.
Most founders are used to a potential investor drilling them on business models and strategies, but you need to return the favor. The first part of the relationship might revolve around getting the investor comfortable enough to invest. However, you need to be just as comfortable to accept his offer. Do your due diligence, and make sure both of your visions align.
2. They’re People, Not Accounts — Get to Know Them.
If someone has enough money to consider investing in your startup, he's seen wins and losses. Ask him about both, and don’t skirt his failures. Experienced entrepreneurs know that failures are often even better learning opportunities than successes.
If possible, talk to other companies he has invested in. Some companies might have become very successful, but how did the growth partner treat those that failed? The right kind of investor will continue to mentor someone and have a relationship whether that person has realized his potential or is still trying. The wrong kind of growth partner will press a lawsuit forward and make you regret ever taking him on.
3. Look Past the Money.
Money is only part of the equation — you need guidance, as well, whether you think you do or not. Make it clear that you’re looking for a mentor, and you might be surprised by what investors can offer you.
Whether it’s strategic partnerships that unlock new ways for your company to grow, a CFO who can help you model cash flow, or an HR expert who can work out the kinks in your hiring and firing process, the possibilities are endless.
Of course, any strategic partnership comes with a certain degree of risk, so keep a lawyer on hand to help you write any necessary performance clauses. Under the right circumstances, these deals that investors facilitate can be far more valuable than the cash that first prompted you to approach them.
4. Strive for Authenticity.
Trust is everything. Don’t lie about your experience, and don’t be desperate even if you’re in dire need of funding. Nothing good comes out of desperation, and it will scare off potential investors.
Once you violate trust, it’s almost impossible to earn it back.
Airing your own dirty laundry might not seem like a good idea, but it’s important for potential partners to know who you are and what you’ve been through. It’s far easier to find things out in the first meeting and have it be the last than wait until months have passed and all parties have invested time, money, and energy into an endeavor.
Partnering with someone who has compatible expertise requires taking an honest look at your strengths and weaknesses. It can be hard, but it’s not nearly as difficult as watching someone you never should have partnered with try to take advantage of a company you created with your own blood, sweat, and tears.
Countless entrepreneurs have made this mistake, so learn from them, and don’t accept money without first deciding whether you want to accept the person behind it.